June 17, 2024
The Policy Statement asserts that “the U.S. Government is playing an increasingly important role in carbon credit markets” and serves to “codify the U.S. Government’s approach to advance high-integrity voluntary carbon markets.”
On May 28, 2024, the Biden-Harris Administration (“Administration”) released a Joint Statement of Policy and new Principles for Responsible Participation in Voluntary Carbon Markets (the “Joint Statement”) announcing the U.S. government’s approach to further developing high-integrity voluntary carbon markets (“VCMs”).[1] The principles and statement are cosigned by Treasury Secretary Janet Yellen, Agriculture Secretary Tom Vilsack, Energy Secretary Jennifer Granholm, Senior Advisor for International Climate Policy John Podesta, National Economic Advisor Lael Brainard and National Climate Advisor Ali Zaidi.
Background:
High-integrity VCMs complement mandatory carbon markets as well as other clean energy products such as Renewable Energy Certificates (“RECs”) in a sustainability portfolio and are considered crucial to promoting sustainability goals and carbon reduction and removal efforts by providing a market for the purchase and sale of carbon offsets. While federal regulators such as the Commodity Futures Trading Commission (the “CFTC”), the Securities and Exchange Commission (the “SEC”) and the Environmental Protection Agency (“EPA”) are interested in VCMs, there is currently no primary federal regulatory regime for VCMs nor is there a clear legislative framework on the horizon.
The CFTC and the SEC have said that carbon credits are “environmental commodities,” which means that the carbon credits themselves are not derivatives and they are not securities. As a result, neither the CFTC nor the SEC has issued rules regulating the trading of carbon credits in VCMs. The CFTC has enforcement authority over fraud and manipulation in VCMs but no rulemaking authority. However, derivatives on carbon credits would be regulated by the CFTC and subject to the CFTC’s rules. The SEC has authority over public filers and others under its jurisdiction that participate in the VCMs, including disclosure requirements. There have been SEC enforcement actions related to greenwashing and funds’ environmental, social and governance (“ESG”)-related internal controls, as well as comment letters pressing public companies on perceived inconsistencies between sustainability report disclosures and their SEC filing obligations. Although trading in the VCMs is largely unregulated, there may be certain state regulation for brokers and other participants in VCMs. Accordingly, certain industry groups have been working to come up with consistent standards, practices, and codes of conduct across VCMs.
Absent a clear regulatory framework, there are some concerns that VCMs are sufficient to produce additional decarbonization activity and provide certainty that a carbon credit actually represents the removal or reduction of one tonne of carbon dioxide, or is equivalent, from the atmosphere as a result of a particular project.
VCMs are still developing in the United States. While pressure to participate in these markets mounts, many would-be participants are wary. Among other reasons, companies are cautious due to activist and regulatory scrutiny of greenwashing, consumer fraud, securities laws violations (e.g., greenwashing or disclosures), verification issues and associated reputational concerns.
As a counterweight, and to demonstrate its commitment to VCMs, the Joint Statement outlines how the U.S. Government seeks to shape VCMs in line with the principles for responsible participation detailed below. The publication of the Joint Statement indicates that the U.S. government thinks that current private sector initiatives have room for improvement. The principles enunciated in the Joint Statement are one component of the U.S. Government’s efforts in this area, and the Administration has called upon the “U.S. private sector and other stakeholders in the carbon credit value chain to responsibly participate in VCMs, consistent with the principles” of the Joint Statement.
Principles for Responsible Participation:
The Joint Statement announces seven principles, which are not exhaustive, that seek to codify and strengthen concepts and practices already developed market participants, governments and international bodies. The primary aim of these principles is to inform and support the continuing development of VCMs. The principles are as follows:
Principle 1: Carbon credits and the activities that generate them should meet credible atmospheric integrity standards and represent real decarbonization, including these elements:
The Joint Statement also emphasized that verifiers and issuers of carbon credits play a pivotal role in VCMs, and that they should:
Principle 2: Credit-generating activities should avoid environmental and social harm and should, where applicable, support co-benefits and transparent and inclusive benefits-sharing.
The Joint Statement here emphasizes protecting local communities, considering impacts on land, use, food security, and biodiversity and encourages stakeholder to respect Free, Prior and Informed Consent where applicable.
Principle 3: Corporate buyers that use credits should prioritize measurable emissions reductions within their own value chains.
Principle 3 relates to taking inventory of Scope 1, 2, and 3 emissions and regularly reporting them, and setting clear emissions targets across multiple time horizons, and collaborating with suppliers.
Principle 4: Credit users should publicly disclose the nature of purchased and retired credits.
Disclosure of purchased, cancelled, or retired credits should be issued at least annually and include reasonable detail sufficient for an outside observe to assess the integrity of credits. The format should be consistent and considerate of evolving market practices, including the consideration of aggregate public reporting.
Principle 5: Public claims by credit users should accurately reflect the climate impact of retired credits and should only rely on credits that meet high integrity standards.
Claims should rely only on the impact of credits that meet current high integrity standards at the time the claim is made and that avoid adverse impacts (see Principles 1 and 2 above). These claims should be in the context of a corporate climate strategy that prioritizes within-value-chain emissions reductions (see Principle 3 above). Unless remediation has occurred (e.g., through buffer pools), credits that have been reversed or otherwise negated should not be used as the basis for any claims.
Principle 6: Market participants should contribute to efforts that improve market integrity.
Consistent with past statements of the U.S. Government and regulatory agencies, the Joint Statement recognizes the need for private sector initiatives to develop high quality VCMs but is agnostic with respect to the particular market structure.
Principle 7: Policymakers and market participants should facilitate efficient market participation and seek to lower transaction costs.
Lowering transaction costs could facilitate greater market participation, and the Joint Statement encourages collaboration among all stakeholders to achieve these aims. The use of well-calibrated models may reduce MMRV costs and improve credit integrity.
Actions to Develop VCMs:
In its Fact Sheet[2] accompanying the announcement of the Joint Statement, the Administration also emphasized related efforts by the U.S. Government:
Takeaways and Considerations:
Although the Policy Statement does not call for legislation, it asserts that “the U.S. Government is playing an increasingly important role in carbon credit markets” and serves to “codify the U.S. Government’s approach to advance high-integrity VCMs.” In that regard, the Policy Statement may be best understood as a roadmap for developing and refining industry standards, as well as for future legislative and regulatory actions. Additionally, the Policy Statement may serve as a bridge to a state of play where participation and conduct in VCMs are not entirely voluntary for companies to meet their sustainability goals. In the meantime, VCMs will lack a formal regulatory regime.
Accordingly, companies should consider the following when determining whether and how to participate in VCMs:
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[1] See Voluntary Carbon Markets Joint Policy Statement and Principles (May 2024), available at: https://www.whitehouse.gov/wp-content/uploads/2024/05/VCM-Joint-Policy-Statement-and-Principles.pdf
[2] https://www.whitehouse.gov/briefing-room/statements-releases/2024/05/28/fact-sheet-biden-harris-administration-announces-new-principles-for-high-integrity-voluntary-carbon-markets/
[3] https://home.treasury.gov/system/files/136/NetZeroPrinciples.pdf
[4] For more detail on this CFTC proposal, please refer to Gibson Dunn’s earlier client alert, available here.
[5] https://www.cftc.gov/PressRoom/PressReleases/8723-23
[6] https://www.cftc.gov/PressRoom/PressReleases/8736-23
[7] https://www.iosco.org/library/pubdocs/pdf/IOSCOPD749.pdf
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